Monday, January 09, 2006

“Plastics”

Mr. McGuire: I want to say one word to you. Just one word.Benjamin: Yes, sir.Mr. McGuire: Are you listening?Benjamin: Yes, I am.Mr. McGuire: Plastics

Most anyone over forty can identify that those lines come from The Graduate.

Over the years, the word “Plastics” by itself, said with a sarcastic, I-am-a-heartless-money-grubbing-adult-who-does-not-know-the-true-meaning-of-life intonation has become a tag line, used in the media every time some new money-making trend comes along that captures the imagination of a new generation.

In fact somewhere, I’ll bet, right now, “Plastics” is being invoked by some headline writer to describe the Google phenomenon, as a way of encapsulating that search engine’s hold on both popular culture and on Wall Street’s fertile, trees-grow-to-the-sky imagination.

Just last week we had the complete breaking of the “price-target” barrier for Google—the first unabashedly Bubble-Era price target for the stock, a whopping $2,000 a share, by Mark Stahlman, who is receiving Henry Blodget-style attention for his call, and not all of it scornful.

Almost unnoticed in the Google-phoria, however, has been the recent revival of a company that was left for dead in the wake of the Internet bust. To whit: Sun Microsystems.

Sun is the last of the “Four Horsemen of the Internet” (Cisco, Oracle, EMC and Sun) to recover its bearings from the post-Bubble crash, and probably the least-admired of the bunch among Wall Street’s Finest. It was also, last I watched, getting one of those eye-rolling, sudden-onset-of-migraine faces and an emphatic “Sell-Sell-Sell” from Jim Cramer on Mad Money.

But a funny thing happened on the way to Chapter 11. Sun Micro’s stock has been showing up on the new high list. And, get this: it’s actually outperformed Google this year.

That’s right: both stocks opened the year around $420 (multiplying SUNW by 100). And on Friday, GOOG closed at $466 while SUNW closed at $471.

No, I’m not a big fan of Sun, nor do I own the stock. Yes, I know that four days’ worth of so-called “out-performance” means nothing at all.

But after considering Sun’s appearance on the new high list and pondering the apparent recovery in one of the most poorly managed of the major IT equipment makers—measured by almost any metric you want to throw out there—I am beginning to wonder if it has to do with a single word, like plastics.

In this case, however, the word is: “Storage.”

Yes, we all know storage needs are increasing a lot. But to understand what that actually means, I have looked at my own storage needs, as measured by the capacity utilization at two email accounts—a ten-year old Microsoft Hotmail account, and an 18-month old Google Mail account—and I can confidently say that storage needs are increasing A LOT.

Thanks to Google’s “never-delete-anything” email structure and easy search techniques, I've archived over 400 emails in the last few weeks, half of which I would have deleted out of my MSN account.

With Google Mail’s search capability, you get comfortable actually keeping pretty whatever email comes in—except for the Thank You Please Congratulations I Have Ten Million Necessary Nigerian Bank Account emails that get through the spam-filter—without fear you won’t be able to find the email when you actually need it.

Once your mindset becomes comfortable with this shift away from the delete-everything-not-necessary mode, you start to run up some pretty serious megabits at the Google storage farm.

To put a number on it, in my MSN hotmail account, which, as I said, has been around for more than ten years, I am currently using 120 megabytes out of the 2,000 available for storage.

On Google Mail, which I have had since July 2004 but only began using for the last two months (following the last and final disruption by Microsoft Hotmail, which started automatically moving new emails into the Trash Can without asking), I am currently using 134 megabytes out of 2,682 available—and that capacity is increasing daily.Hmmm...120 megabits in 10 years versus 134 megabytes in 2 months. That's some acceleration in storage demand.Combine changing email habits with video and photography sites such as Flikr and YouTube that are collecting massive amounts of digital content—and you're talking about mega-megabits.

Which makes me think the word from the cuckolded Mr. McGuire to poor, confused Benjamin, would today be “Storage.”

How an investor can make money from the trend is a question for the house. Whether Sun Microsystems becomes more than a temporary resident of the 52-Week High list and makes Cramer’s “Buy-Buy-Buy” or Hallelujah Chorus buttons is something else.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

18 comments:

My cell phone should have a picture ID , drivers license with picture and credit-card with picture stored in it...Wallet and cell become one . Online payments should become safer with photo credit-cards . Identity theft should be made harder with photo transactions. All takes up storage...

i don't have a cell cause i don't like carrying stuff around. The need for a drivers license forces me to carry a wallet...

Not to be nit-picky, but you meant to say 'megabytes' not 'megabits' (a 'byte' being 8 'bits' and the standard for storage, bits being more so for bandwidth). But I do believe that you are on to something as storage, in all it's forms (hard drive, NAND flash, etc) is certainly one of the most important aspects of any system. And with all the new services that are coming our as well (VOD, high definition film and broadcasting, etc) there really is no end in sight to our future storage needs. CES has shown us all the new ways we consumers need to spend our money and most of them require storage at some point along the way.

I think your observations on storage are dead on. Especially with the recent development of people using their computers (and now cell phones) to manage their photo, music, and movie libraries, the need for storage is sky-rocketing.

Good thing for storage consumers is that storage is getting cheaper and cheaper, you can now buy a 250GB hard drive for about $150 - getting close to 50 cents/GB - very cheap indeed.

I am not sure what this does for storage producers, but I can't imagine they have great margins.

This is definitely not my area of expertise, but I don't think many people out there associate Sun with storage (aren't they the "Computer is Network" or something like that, guys?), so I doubt they can get much lift here.

On a related note, hard disk makers have been on a tear - both MXO and WDC have posted spectacular gains since mid-November.

I don't want to poo poo the storage commentary because Sun recently bought cash cow STK, one of the best storage companies on earth. But, I think it's more than that. It was a recognition that their strategy was pathetic and being nimble enough to change it. McNealey has been on the heap of dead beats many times in the past. In fact, pre-tech bubble, Sun was presumed dead and McNealey was considered out of touch. He came roaring back to lead the tech bubble. The reality is Scott has been very resilient and able to come back from the dead.

(He needs a reverse split to get his stock price up to get over this psychology many people have that IBM trades at 85 and Sun at 5. The retards that don't understand market cap, shares outstanding, etc. Believe me, there are many.)

The new strategy includes an adoption of Intel/AMD technology to complement SPARC technology in the processor space, embracing open source including Linux as well as making Solaris open source thus playing on a trend Sun started years ago by throwing technology into the open source community for broad adoption which ultimately leads to revenue gains, a realization that a middleware stack is necessary to compete against HP and IBM and finally getting back on track with processor performance/virtualization technologies within their core Unix servers.

Thus, storage is important but Sun really has transformed itself once again. Will it stick? I think so. Is the stock going to 10 or more? Hmmm....

In the long run, there probably will be no limits (still debating that internally) - in the short term, we need to keep a handle on scale and growth :)

I should point out that there is a very real cost to storage - it maybe be cheap to buy a gig of storage for your PC (maybe US$0.60 or so per GB if you buy at the sweet spot) this is not what it costs us.

First, there is disk level redundancy (RAID) inside each storage server, then there is machine level redundancy for each server in the cluster (basically, every storage server has a complete twin, just in case some other (non-disk) component fails). And then there is offsite disaster recovery - a third clone of each storage server, in case of earthquake, nuclear war, etc.

That means that each (size of each) image occurs on the equivalent of 4+ disks. Each of these disks sits behind an expensive raid controller, and is part of a server that also needs RAM, a CPU, a motherboard, a case, etc. After a while it starts to add up - we definitely spend more on storage than we do on bandwidth :)

Anyway, in the meantime, we're thinking about letting people buy additional GBs. So far, the demand is limited to about 10 people, but hey! we aim to please!

Interesting discussion. While we are talking about storage, is it worthwhile to consider storage needs on the PC? Windows Vista will need 2x the current recommended DRAM configuration. Is that not a very good situation for Micron (MU)?

DRAM prices have bounced off of very depressed levels. Meanwhile, virtually every other commodity in the world is white hot.

"Although Hopkinton-based EMC has delivered nine straight quarters of double-digit revenue growth and expects to see a 10th from last year's fourth quarter, the company's stock price has remained flat as storage hardware has become an increasingly lower-cost commodity."

Now i'm reading our social services and unemployment agancies are going digital .

i'm wondering how much fraud could be avoided with digital applications with photo's ...all kinds of fraud ..mortgage , social services , credit... And now that i think about it what about the many 1,000's of cameras our city and State gov have placed in and around airports , train stations etc...

Xrays are all going digital . The best doctors in the field can view them online. A patient in Turkey with bird flu can have the best Pulmonary people at Columbia Presbterian take a look and look often ...Serious lung troubles might require Xrays on a hourly basis. The Doctors can look at them at work and at home.